William N. Goetzmann
Roger G. Ibbotson

The correlation of investment classes is central to the asset allocation decision. In this article, we show how broadly diversified portfolios of real estate interact with other major asset classes, especially stocks and bonds. The experience of the last 40 years indicates that housing prices move up when stock prices move down, and vice-versa, while commercial real estate has little or no relationship to the stock market. Both of these are good news for institutional investors seeking to hedge against inflation and fluctuations in financial markets. Increases in interest rates also influence real estate returns, driving housing values lower and commercial real estate returns higher.